Crisis tax drains work for Hungary’s lawyers but new opportunities emerge

Crisis taxes and regulatory changes have doused foreign investor interest but firms are gaining opportunities elsewhere as a result of the global crash.

Q: What impact have the so-called ‘crisis taxes’ imposed in 2010 had on your business and that of your clients? Do you think this has dissuaded foreign investors?

Andrea Jádi Németh, managing partner, bpv Jádi Németh : Crisis measures are frequently unexpected, unequal and burdensome. A special tax directed at certain industries or sectors artificially shakes the market and alters the once-level playing field. Although announced as a temporary measure, its impact has been definite. As crisis taxes were imposed on telecom, energy, banking and retail companies, it hit some of the largest foreign investors in the country.

Such governmental decisions inevitably resulted in a greater need for focused legal services as the affected companies sought complex professional advice to respond adequately and mitigate the economic impacts. Consequently, our restructuring and transactional activities increased and the need for regulatory advice was greater than ever before.

The introduction of the crisis measures attracted global media attention on Hungary as they directly harmed certain foreign investments. At the same time the vast majority of the Hungarian GDP is still generated by the Hungarian affiliates of multinationals and all big development projects are – at least partially – financed from EU funds. This implies that despite the sometimes overly well-founded critiques concerning the crisis measures, it is still worthwhile doing business in Hungary.

Iván Bartal

Iván Bartal and Zoltan Marosi, partners, Oppenheim: Although the legal profession has not been directly affected, several of our clients in the banking, TMT, retail and other sectors have been badly hit by these special taxes, which, in turn, has also had a negative impact on legal budgets.

As the predictability and stability, as well as the non-discriminatory nature of the legal environment are key investor considerations when planning a foreign investment, it appears that these developments have indeed dissuaded foreign investors. The government’s intent to restrict transparency and prefer ‘strategic co-operation agreements’ to competition has added to this.

Akos Kovach and Francois d’Ornano, partners, Gide Loyrette Nouel : The global economic climate since the financial crisis in 2008 has not left Hungary untouched: several state measures were adopted in order to maintain the state budget’s stability.

It is true that specific taxes introduced in Hungary since 2010 seriously affected businesses operating in the relevant sectors (financial, telecoms, food retail, etc). But it is the rapidly changing legal environment, as a result of an active economic policy from the government, that constitutes a bigger concern for foreign investors because the environment becomes unpredictable, which is a difficult risk to manage. Partly due to this uncertainty of the regulatory framework, the volume of major projects has decreased significantly in the recent years.

In several cases, we experienced investors putting the project on hold or rescheduling their implementation. Some of them left and placed projects in other countries in the region.

Q: There are now only a handful of foreign-headquartered law firms with Budapest offices. Do you expect the remaining firms to stay in the market or to consolidate their presence (as Dentons has done)?

Jádi Németh: The presence of foreign-headquartered law firms has long been a strong signal for international businesses in Hungary. In my view the future of these firms can be considered from three perspectives. On one hand Hungary should remain attractive for foreign direct investments as our country doesn’t have the internal resources and structures to restore a strong and sustainable budget position as well as maintain long-term economic growth. Whom and how to attract them are strategic questions for the Hungarian government that will certainly shape the composition of the local legal market, too.

“The economic climate since the 2008 financial crisis has not left Hungary untouched” – Kovach and d’Ornano

The global financial downturn required extreme adaptivity from small and large companies alike. Flexibility became a necessity and careful planning resulted in local law firms with strong professional qualities and some kind of international affiliation. I expect this trend to continue.

Parallel to that, the Hungarian state has acquired decisive ownerships in certain sectors during the past years. The state’s increasing involvement in the economic scene not only alters the conditions and the nature of competition, but also affects the dynamism of the servicing legal market. So it’s possible that there will be larger movements and law firms (either Hungarians or from the strongest FDI countries) that will earn measurable market shares with innovative structures and solutions.

Bartal and Marosi: The number of M&A deals has been on a steady increase, and our antitrust and competition practice has been very active advising clients in a wide range of matters. These include various proceedings before the Hungarian Competition Authority concerning cartel and dominance allegations, judicial review proceedings before courts as well as the design and implementation of competition compliance programmes. Due partly to the dramatic rise of monetary fines imposed by the Data Protection Authority as well as companies’ increasing wariness of compliance issues, our workload in these areas has also grown.

Akos Kovach

Kovach and d’Ornano: Due to the legislative changes, our regulatory work has significantly increased during the last couple of years. It is not only the volume of the changes but also their rapid implementation that presents a challenge to our clients and generates a greater need for compliance services.

This new situation poses new challenges: we have to go the extra mile and provide our clients with more than just answers to their questions. We have to gain a full understanding of the economic background as well as our clients’ business strategies in order be able to give them fully fledged solutions to their problems.

We also recently experienced an increasing volume of litigation work. We believe that clients’ attitude to litigation has also changed due to recent changes in the economic environment and disputes are now solved in court rather than in meeting rooms. Clients are demonstrating less flexibility over contentious matters and more often decide to try to solve them through judicial proceedings.

Q: What are your firm’s strategic priorities for the next two years?

Jádi Németh: While our office earned a solid reputation for its M&A work and our advisers became sought-after litigators, we didn’t have the level of specialisation our multinational counterparts offered. With the exit of more foreign-headquartered law firms I see a clear momentum for growth and parallel to that a market demand for niche practices and top-quality specialisation. After focusing on development, we now have leading practices in competition law, energy, regulatory, labour law and litigation. This offers us possibilities for expansion and room for further strengthening our position in the top league of law firms in Hungary.

Bartal and Marosi : The answer probably varies with each foreign-headquartered firm. In our experience, the Hungarian market is a very competitive one and therefore further consolidation on the market among these firms might well be in the offing.

We believe that Oppenheim’s business model of being independent while keeping good relations with large international networks offers a very attractive solution to our clients’ needs and enables us to grow organically on the market.

Kovach and d’Ornano: Most international law firms took an opportunistic approach when coming to Hungary in the early 1990s, focusing on transactional work driven by privatisations, inbound investments and development projects.

Nowadays, as the country becomes more mature and almost all assets have been privatised, the volume of transactional work has significantly diminished. Since that time various foreign investors have left the country and some international law firms restructured their presence, prioritising other regions.

Law firms able to maintain their successful operations in Hungary should build a more diversified and balanced business portfolio including litigation and arbitration, competition, compliance and regulatory or even some sector-specific knowledge. These practices are now substantial compared with before 2008.

Since Hungary remains a small market, regional business opportunities should also be seized. This could generate some more high-profile transactional work, which the country has been lacking in the last couple of years. The international law firms, recognising the new trends and being able to provide relevant strategies, will consolidate their presence in the market.

Q: Which practice areas have been most active in the last 18 months, and what sort of work have you been doing in them?

Jádi Németh: Our transactional work has been stronger than expected. We have been involved in mergers and takeovers including cross-border transactions especially in the energy sector and in the manufacturing industries. The corporate combinations and group-level restructurings remained mainly inbound, but there is a new wave of outbound transactions, too. The legislative changes kept the business community very busy and furnished us with major regulatory assignments.

Compliance programme structuring and monitoring has also been gaining higher and higher importance and we expect this trend to persist. Our litigation practice has been building an impressive track record and our cases now span a broad spectrum of businesses.

“The number of M&A deals has steadily increased, and our antitrust practice has been very active” – Bartal and Marosi

Bartal and Marosi : Our most important priority is to keep our competitive edge as the leading independent law firm on the local market and to sustain our profitability, while still attracting and keeping the best talent. We also look forward to strengthening and developing our relations with large international networks that currently do not have a presence in Hungary.

Kovach and d’Ornano: We have already adapted our strategy to these new challenges. We would like to continue to concentrate on our areas of main expertise (restructuring, litigation, regulatory, competition law) and to provide our clients with high-quality practical legal advice based on the perfect understanding of their business.

Our Budapest office is the central seat of the firm’s operations in the South-east Europe region and therefore offers its clients a unique, ‘one-stop shop’ service. We would like to further strengthen our regional practice and concentrate on bigger cross-border transactional mandates to enlarge the geographical scope of our operations.